Disclaimer: The content of these articles is to be used as a general guide only. Professional advice should be sought before taking any action relating to the points discussed in these articles.

WHAT TO DO WHEN AN ACCOUNT GOES BAD

Preparation  
  In setting up an account you should clearly show your trading terms and conditions. Ideally, and certainly for large accounts, your debtor should sign such an agreement. On the credit application form, ask for the individual's full name and address. For a company, you need the ACN number, the registered office and the full names and addresses of major company directors.
  Once your customer has received your goods and services, you need to document thoroughly the action taken to recover the debt. Ask your sales staff to record anything that the debtor says in their post sales follow-ups.
  When you telephone your debtor for the first time document exactly what is said. What you are seeking is an admission that your debtor is happy with the goods and services received. You also want your debtor to admit the debt exists and attempt to get a promise to pay. At this stage of the collection process you should be extremely friendly as one of your aims should be to encourage your debtor to reorder again and again and become a profitable long term customer of your business. Nevertheless, you need to gather as much information as possible in case the matter needs to go to court at a later date.
  In second and subsequent phone calls to your debtor try and eliminate all possible excuses for non-payment. Check that the person who placed the order had authority to do so. Ideally, you would like your debtor to admit the debt in writing. This may be difficult to obtain but may be possible if your debtor offers to pay the account in regular instalments. Even if you don't accept this offer, at least you have an admission of the debt in writing.
  Finally, you will most likely threaten to take legal action or to place the account in outside hands for collection. If you make such threats you certainly need to carry them out.
  If the debtor does not respond to your final notice, you can choose from the following options:  

1. Write off the account as a bad debt.

2. Pursue the debtor yourself through the local courts.

3. Send the debt to a mercantile agent.

4. Refer the debt to your solicitor.

1. Write off the account as a bad debt.
   If the debt is small, this is almost always the best course of action since the cost of recovering the debt including labour may exceed the value of the debt. Also, you could write off the debt if you are unlikely to be paid due to the financial state of your debtor. Even if the debtor has some money left, the taxation department, employees and secured creditors are all due to be paid before you in the event of bankruptcy or liquidation.
  Thirdly, you could write off the debt if your debtor can't be found, ie your mail is being returned and their phone has been disconnected. However, all is not lost in this case. You can still seek help from Directories Assistance or from Electoral Rolls but the Australian Privacy Act of 1988 makes the task of skip tracing very difficult today.

2. Pursue  the debtor yourself through the local
    courts.
  This step appears daunting at first but it is not as difficult or as costly as you may think. All you need to do is take proof of the debt such as copies of relevant invoices to your local court and complete a Statement of Claim. If your debtor is a company, you will need the company name, the ACN number and the registered office of this company. If you do not have this information, then the Australian Securities Commission will be able to help you. Also, the local court will assist you in completing the Statement of Claim.
  In New South Wales, the  fees in May 1999 were $52 for a debt up to $3000, $69 for a debt between $3000 and $10000 and $130 for a debt between $10000 and $40000.
  You can serve the Statement of Claim yourself or ask the Sheriff to serve this for you for a further $34. These fees are payable in advance but can be added to the value of the debt in your Statement of Claim.
  The debtor has 28 days from the date of service to either lodge a defence or confess to the claim and agree to pay the debt in full or in instalments. The debt may be paid to you or to the local court. If your debtor does not respond within 28 days you can go back to the court who will assist you in preparing an affidavit of service of the Statement of Claim in order to obtain default judgment against the debtor.
  Once judgment has been obtained by an order of the court or the debtor has agreed to pay the debt, you can then ask for enforcement by applying for a writ of execution. This cost $44 in May 1999 and empowers the Sheriff to seize goods and sell them at an auction to recover the amount owing to you.
  This is the current procedure in collecting money through the local courts in New South Wales. For more details contact your local court. If you are in another state of Australia or in New Zealand you should also contact your local court for variations on the above procedures.
  As you can see, collecting your money through the local courts does take a little time. So once your debtor has failed to respond to your final notice, don't hesitate in taking further action. After all, you are competing with other creditors for your money and if there is only a limited amount to go around you don't want to be last and miss out.

3. Send the debt to a mercantile agent.
   Mercantile agents send a mixture of final notice letters, letters of demand and solicitors' letters to your debtors. If these procedures are not successful then they will usually attempt to collect your money through the local courts. The mercantile agent will pass these court fees on to you, but will only instigate court action at your request.
  If your account is collected then the mercantile agent usually charges 10% to 40% commission on the value of your debt. Most mercantile agents will not charge commission if the debt is not collected but they will charge you for the initial letters sent to your debtor.
  Mercantile agents can save you a lot of time but they can't work miracles. For instance, if your debtor has no money or has disappeared it is unlikely that a mercantile agent will be able to help you.

4. Refer the debt to your solicitor.
  Solicitors are normally used if the account is very large or if there is a dispute relating to the quality of the goods or services you have provided. Use of solicitors is obviously the most expensive form of debt collection but it also gives you the most chance of collecting your money, especially if your debtor is refusing to pay your account.
  If your debtor is just stalling for time, then generally a solicitor is not a sensible choice. After all, your solicitor will simply apply for a Statement of Claim in the same way you could do yourself or a mercantile agent would do on your behalf.

This article is reprinted from Rentons' Business Tips No. 5
© Copyright May 1999 ACS